NSTAR’s agreement to purchase power from Cape Wind to facilitate the utility’s merger with Northeast Utilities should create savings for ratepayers in the short term, but those savings will likely be offset in the long term by the staggering cost of the offshore wind project.

State officials announced a settlement agreement this afternoon under which NSTAR will purchase 27.5 percent of Cape Wind power, likely the most expensive ever generated in Massachusetts.

The agreement, negotiated outside of public debate, is expected to pave the way for state approval of the proposed merger of NSTAR with Connecticut-based Northeast Utilities.

If approved by the state Department of Public Utilities, the negotiated settlement would freeze the base distribution rates for four years, benefitting customers of the merging companies – NSTAR Electric, NSTAR Gas and Western Massachusetts Electric Company (an NU subsidiary). It would also provide a one-time customer rate credit of $21 million for residential customers of the three companies – an amount that equals half of the estimated four-year savings the companies expect to net from the merger.

The settlement also requires the two utilities to restructure existing rates in the Western Massachusetts Electric service territory that currently result in commercial and industrial customers paying significantly more than the actual cost to serve them.

AIM has opposed power agreements with Cape Wind because the project's cost will burden employers who already pay among the highest electricity costs in the nation. The average electricity price in the U.S. for industrial customers in July 2011 was 7.39 cents per kilowatt hour (kWh) versus 13.87 cents for Massachusetts manufacturers.

National Grid has already committed to purchasing half of the power from Cape Wind. The Cape Wind/National Grid agreement was the first to be approved under a provision of the Green Communities Act that allows utilities to sign long-term contracts for renewable power directly with generators.

The Massachusetts Supreme Judicial Court in December rejected an appeal by AIM of the commonwealth’s approval of the National Grid deal.

Under terms of the proposed settlement, if Cape Wind does not commence “physical construction” (i.e., installation of equipment or materials into the seabed) before December 31, 2015, NSTAR can opt to terminate its power purchase contract with the wind farm. If that occurs, NSTAR agrees to solicit contracts no later than June 30, 2016 to purchase an equivalent amount of power (equal to 2 percent of the company’s total load) from new renewable energy resources qualified under the Massachusetts Renewable Energy Portfolio Standard for Class I renewables.

AIM is disappointed that a merger that would have been good for the ratepayer was basically used as an excuse to force the companies to purchase the highest-priced renewable power in Massachusetts history.

Recent competitively bid contracts have shown that renewable power can be purchased for one-third the price of Cape Wind AIM will review the agreements in detail to assess their full impact on employers.